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B.P Agarwalla And Sons Ltd. v. Commissioner Of Income-Tax And Others.
Structured Summary of the Opinion (Ruma Pal, J.)
Factual and Procedural Background
The assessment years in issue are 1982–83 and 1983–84. The petitioner (a company) received notices dated 16 February 1987 under section 263 of the Income-tax Act, 1961 seeking revision of the assessments for those years on the single, identical ground that the petitioner had claimed a deduction under section 35(1)(ii) in respect of a donation of Rs. 3 lakhs to K.M. Scientific Research Centre. The notices alleged that the research centre's approval had been withdrawn retrospectively by a Government of India notification dated 2 January 1986 (with retrospective effect from 17 January 1980), and that the deduction had therefore been wrongly allowed by the Inspecting Assistant Commissioner.
The petitioner challenged the notices by filing the writ petition now before the court. The petition had been pending in the High Court for close to six years; the court had entertained the petition, issued rule and granted interim relief before concluding consideration on the affidavits filed.
Legal Issues Presented
- Whether a notification withdrawing approval of a scientific research association for the purposes of section 35(1)(ii) of the Income-tax Act can operate with retrospective effect.
- Whether, as a matter of statutory construction, a deduction under section 35(1)(ii) is determined by the status of the research association at the time of payment (i.e., when the donation was made) or by a subsequent withdrawal of approval.
- Whether the Commissioner, by issuing notices under section 263 on the basis of a retrospective withdrawal of approval, acted within jurisdiction or whether there was an initial lack of jurisdiction that warrants interference under article 226.
- Whether the petitioner should be directed to avail itself of alternative statutory remedies before the Commissioner rather than proceed by way of writ.
Arguments of the Parties
Petitioner's Arguments
- The basis of the notices is invalid because there cannot be retrospective cancellation of approval; the approval was in force at the time the payments were made (29 December 1981 and 28 December 1982).
- The deduction under section 35(1)(ii) was properly claimed because the research centre was approved "for the time being" when the payments occurred; hence a later withdrawal should not affect the right to the deduction.
- Relied on precedents (including Seksaria Biswan Sugar Factory Ltd. v. IAC and decisions of the Supreme Court) to show that retrospective withdrawal was impermissible.
Respondents' Arguments
- The petitioner had an alternative statutory remedy and could have raised the issue before the Commissioner; reference was made to CIT v. Ramendra Nath Ghosh.
- The court should not interfere unless there was an initial lack of jurisdiction; reliance placed on Samnuggar Jute Factory Co. Ltd. v. CIT and Simbhaoli Industries Pvt. Ltd. v. Commissioner of Income-Tax.
- Argued by analogy to a Division Bench decision (CIT v. E. Sefton and Co. (P) Ltd.) that proceedings under section 263 should be permissible where subsequent facts (including withdrawal of approval) could be taken into account; S.M. Oil Extraction Pvt. Ltd. was cited to support taking subsequent information into account when initiating proceedings under section 263.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Seksaria Biswan Sugar Factory Ltd. v. IAC, [1990] 184 ITR 123 (Bombay High Court) | Considered facts substantially identical to the present case; held that retrospective cancellation of approval by notification dated 2 January 1986 was apparently invalid and unreliable so formation of belief that income escaped assessment on that basis was without material. | The court adopted and relied on the reasoning in Seksaria to conclude the retrospective cancellation was invalid and that the Commissioner had no material to form the requisite belief under section 263. |
| ITO v. M.C. Ponnoose, [1970] 75 ITR 174 (Supreme Court) | General principle: statutes and subordinate legislation are prospective unless express words or necessary implication show retrospective intent; subordinate authorities cannot make rules with retrospective effect unless empowered explicitly. | Quoted to support the proposition that withdrawal of approval could not be given retrospective effect absent express empowerment; used to limit the validity of the Government's retrospective withdrawal. |
| Bakul / Bahul Cashew Co. v. STO, [1986] 159 ITR 565 (Supreme Court) | Reiterates that statutes are to be given prospective effect unless expressly or by necessary implication retrospective operation is intended; especially strictly construed in fiscal statutes. | Relied upon to underscore that fiscal provisions are strictly construed and retrospective operation will not be readily ascribed; supported conclusion that subsequent withdrawal could not invalidate a deduction already correctly claimed. |
| CIT v. Ramendra Nath Ghosh, [1971] 82 ITR 888 (Supreme Court) | Authorities relied on by respondents to support the availability of alternative remedies before revenue authorities (i.e., Commissioner) rather than immediate resort to writ jurisdiction. | Court considered this contention but rejected it as unsound here because the Commissioner could not effectively determine the validity of the Government notification withdrawing approval and because of the long pendency in the High Court. |
| Samnuggar Jute Factory Co. Ltd. v. CIT, [1990] 181 ITR 221 (Calcutta High Court) | Support for the proposition that courts should not interfere unless there is an initial lack of jurisdiction. | Cited by respondents; court noted the cases did not limit the court's power to scrutiny of jurisdiction only and found them distinguishable on facts. |
| Simbhaoli Industries Pvt. Ltd. v. Commissioner of Income-Tax, [1991] 192 ITR 342 (All) | Also cited for the proposition that interference is limited absent initial lack of jurisdiction. | Cited by respondents; court observed these decisions did not confine article 226 interference to mere jurisdictional enquiry and therefore did not preclude relief here. |
| CIT v. E. Sefton and Co. (P) Ltd., [1989] 179 ITR 435 (Calcutta High Court, Division Bench) | Held that proceedings for rectification under section 154 could be permissible on the basis of a retrospective amendment (there was an admittedly retrospective amendment in that case). | Cited by respondents by analogy; the court held the decision inapplicable because Sefton involved an express statutory retrospective amendment, which is absent here. |
| Commissioner of Income-Tax v. S.M. Oil Extraction Pvt. Ltd., [1991] 190 ITR 404 (Calcutta High Court) | Holds that the Commissioner can take subsequent information into consideration for initiating proceedings under section 263 (i.e., an assessment which was good when made may appear erroneous in light of subsequent information). | Cited by respondents; court accepted that subsequent information may be considered but distinguished the present case because the controlling question was whether the Central Government could validly rescind approval retrospectively at all. |
| Indian Card-board Industries v. Collector of Central Excise, [1992] 58 ELT 508 (Calcutta High Court) | Enumerated circumstances under which a court exercising jurisdiction under article 226 will interfere with a show-cause notice (five specific circumstances listed in the opinion). | The court applied the same principles to notices under section 263 and held the impugned notices suffered from an incurable infirmity under those principles. |
Court's Reasoning and Analysis
The court's reasoning proceeded in the following steps, strictly grounded in the text:
- Examination of timing: The payments by the petitioner to K.M. Scientific Research Centre were made on 29 December 1981 and 28 December 1982. The notification dated 20 August 1981 (effective 17 January 1980 to 16 January 1983) showed that the research centre's approval was in effect when the payments were made. Thus, at the time of payment the two conditions in section 35(1)(ii) — (a) the association's object to undertake scientific research and (b) that the association "is for the time being approved by the prescribed authority" — were satisfied.
- Statutory construction regarding retrospective effect: The court observed the well-established principle that statutes and subordinate legislation are to be given prospective effect unless express words or necessary implication indicate retrospective intent. It cited the Supreme Court (ITO v. M.C. Ponnoose and Bahul/Bakul Cashew Co.) for this proposition and noted that fiscal statutes are even more strictly construed against retrospective effect.
- Irrelevance of subsequent withdrawal to an otherwise valid deduction: On a plain reading of section 35(1)(ii), a deduction depends on the status "for the time being" (i.e., at payment). Because the conditions were met when the petitioner paid the sums, the subsequent withdrawal of approval does not defeat the petitioner's right to claim the deduction. The court therefore found it unnecessary to resolve whether the approval could be rescinded retrospectively because the claim succeeded on the timing construction alone.
- Legality of the Commissioner's assumption of jurisdiction: Because the retrospective withdrawal itself was unsupported by language authorizing retrospective effect and because the deduction was valid at the time of payment, the court held that the Commissioner's assumption of jurisdiction under section 263 (based on the retrospective withdrawal) was "wholly illegal."
- Rejection of the "alternative remedy" contention: The court rejected the respondents' submission that the petitioner should have first sought remedy before the Commissioner. It reasoned that the Commissioner could not adjudicate the legality of the Government's notification withdrawing approval (a matter affecting the validity of the notification itself), and given the six-year pendency and procedural history (writ rule and interim order already issued), it would be inappropriate to direct the petitioner to pursue a statutory remedy at that juncture.
- Application of article 226 interference standards: The court adopted the criteria it had earlier articulated in Indian Card-board Industries for interfering with show-cause notices under article 226 and held those principles applicable to section 263 notices. Finding that the impugned notices suffered from an "incurable infirmity" (in that they were founded on an invalid basis), the court concluded interference was warranted.
- Distinction from authorities relied on by respondents: The court distinguished E. Sefton (which involved an express retrospective statutory amendment) and S.M. Oil Extraction (which permits consideration of subsequent information) on the ground that neither authorized a Governmental retrospective rescission of an approval which would affect an otherwise valid deduction made while approval was in force.
Holding and Implications
Holding: The writ petition is allowed; the impugned notices under section 263 dated 16 February 1987 in respect of assessment years 1982–83 and 1983–84 are set aside and any proceedings taken on the basis of those notices are quashed.
Implications and consequences:
- Direct effect: The specific notices under challenge (annexure "G" to the petition) are quashed and any proceedings premised upon them are annulled; the petitioner retains the deduction claimed for the payments made while the research centre was approved.
- On legal principle: The court applied established rules of statutory construction (prospective effect in the absence of express retrospective words) and emphasised that deductions under section 35(1)(ii) depend on the status of the research association at the time of payment; a subsequent withdrawal of approval cannot defeat a right already vested by virtue of being in force when the payment was made.
- On precedential effect: The court relied on existing authority (including the Bombay High Court decision in Seksaria) for its conclusion. The opinion distinguished cases where there was an express statutory retrospective provision (e.g., E. Sefton) and therefore did not hold that a general power to rescind can be exercised retrospectively; it did not purport to announce a novel principle beyond these applications.
- Costs: There was no order as to costs.
Ruma Pal, J.:— The assessment years in question are 1982–83 and 1983–84. The subject-matter of challenge are two notices issued under section 263 of the Income-tax Act, 1961, both dated February 16, 1987, seeking to revise the assessment for the assessment years in question on the identical ground. The ground stated is that the petitioner had made a donation of Rs. 3 lakhs during the relevant financial year to K.M Scientific Research Centre and got the benefit of section 35(1)(ii) for the assessment year in question. It has further been stated that the approval allowed to the research centre had been withdrawn with retrospective effect from January 17, 1980, by the Government of India by a notification dated January 2, 1986, and that the benefit had been allowed wrongly to the petitioner-company in the assessment for the assessment year by the Inspecting Assistant Commissioner.
2. The petitioner has contended that the basis of the notices is invalid as there could be no retrospective cancellation of approval. Reliance has been placed on the decision of a learned single judge of the Bombay High Court in Seksaria Biswan Sugar Factory Ltd. v. IAC, [1990] 184 ITR 123 in this connection, ITO v. M.C Ponnoose, [1970] 75 ITR 174 (SC) and Bakul Cashew Co. v. STO, [1986] 159 ITR 565 (SC). The respondents have contended that the petitioner had an alternative remedy as the Commissioner could decide the issue raised. Reference has been made to CIT v. Ramendra Nath Ghosh, [1971] 82 ITR 888 (SC). It is also contended that unless there was an initial lack of jurisdiction, the court should not interfere. Reliance has been placed on the decision in Samnuggar Jute Factory Co. Ltd. v. CIT, [1990] 181 ITR 221 (Cal) and Simbhaoli Industries Pvt. Ltd. v. Commissioner Of Income-Tax., [1991] 192 ITR 342 (All). Thirdly, it is contended that a Division Bench of this court had held that proceedings for rectification under section 154 were permissible on the basis of the retrospective amendment of the law. It is argued that if that is possible, proceedings under section 263 should, by the same token, be permitted. The Division Bench judgment is CIT v. E. Sefton and Co. (P) Ltd., [1989] 179 ITR 435 (Cal). It is stated that the Commissioner could take the subsequent fact of the withdrawal of the notification into consideration while exercising powers under section 263. It is submitted that the case of Commissioner Of Income-Tax v. S.M Oil Extraction Pvt. Ltd., [1991] 190 ITR 404 (Cal) supported this submission. It is stated that the Commissioner's action would have to be judged with reference to the time when the Commissioner issued the impugned notices. As on that date there was no approval of the research centre, payment to the research centre did not entitle the petitioner to the benefit of deduction under section 35 of the Act. section 35(1)(ii) reads as follows:
“35. (1) In respect of expenditure on scientific research, the following deductions shall be allowed,—…
(ii) any sum paid to a scientific research association which has as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research:
Provided that such association, university, college or institution is for the time being approved for the purposes of this clause by the prescribed authority.”
3. The notification dated August 20, 1981, reads as follows (see [1982] 133 ITR (St.) 18.):
“No. 4185 (F. No. 203/134/79-ITA. II): In continuation of this office Notification No. 2739 (F. No. 203/197/78-ITA. II), dated March 1, 1979*, it is hereby notified for general information that the institution mentioned below has been approved by the Indian Council of Agricultural Research, the prescribed authority for the purposes of clause (ii) of sub-section (1) of section 35 of the Income-tax Act, 1961.
Institution
K.M Scientific Research Centre, Masondha, Moti Nagar, Faizabad (U.P)
This notification is effective for a period of 3(three) years from January 17, 1980, to January 16, 1983.”
The payment by the petitioner to the research centre was made on December 29, 1981, and December 28, 1982. In other words, when the payment was made the notification was very much in effect.
No doubt under clause 21 of the General Clauses Act a power to issue an approval would include the power to rescind. But the question is whether such decision can be retrospective. It is a well established principle of construction that every statute is to be given prospective effect unless it has expressly or by necessary implication been made to have retrospective operation (see Bahul Cashew Co. v. STO, [1986] 159 ITR 565 (SC).
In the case of ITO v. M.C Ponnoose, [1970] 75 ITR 174 (SC); the Supreme Court has held (at page 177):
“The courts will not, therefore, ascribe retrospectivity to new laws affecting rights unless by express words or necessary implication it appears that such was the intention of the Legislature. Parliament can delegate its legislative power within the recognised limits. Where any rule or regulation is made by any person or authority to whom such powers have been delegated by the Legislature, it may or may not be possible to make the same so as to give retrospective operation. It will depend on the language employed in the statutory provision which may, in express terms or by necessary implication, empower the authority concerned to make a rule or regulation with retrospective effect. But where no such language is to be found, it has been held by the courts that the person or authority exercising subordinate legislative functions cannot make a rule, regulation or bye-law which can operate with retrospective effect.”
4. It may be mentioned that the courts are even wary to interpret a statute as conferring power to act retrospectively where the statute is a fiscal one so that even where the statutory provision is retrospective it is strictly construed. On a plain reading of the section, it appears that a deduction is allowable if at the time when the same is paid to the research association, the research association has as its object the undertaking of scientific research, etc., and that the association is for the time being approved by the prescribed authority. It is not in dispute that both these conditions had been fulfilled when the payment was made by the petitioner. Therefore, the subsequent withdrawal of the approval by the prescribed authority would not affect the right to claim the deduction. This interpretation of the section renders it unnecessary to consider whether the approval could be withdrawn retrospectively.
5. There is, however, nothing in the language of section 35 which would justify the court in coming to the conclusion that the power to rescind an approval of a research association could be withdrawn with retrospective effect. If there were any doubts in the matter, on the authority of the decisions noted earlier, the Central Government could not have withdrawn the approval granted under section 35(1)(ii) to the research centre with retrospective effect. It also follows that the basis of the Commissioner's assumption of jurisdiction under section 263 was wholly illegal.
6. The respondent's contention that the petitioner could have availed of the alternative remedy by appearing before the Commissioner does not appear to be sound. The Commissioner would not be able to determine the legality and validity of the notification dated January 2, 1986, by which the approval granted to the research centre was withdrawn. In any event, the matter has been pending before this court for close on six years. The court entertained the writ petition and issued a rule and passed an interim order. At this stage, after the affidavits had been completed, this court should not, in my view, direct the petitioner to avail of the statutory remedy, if any.
7. There could be no quarrel with the proposition that the court exercising jurisdiction under article 226 will interfere with the issuance of a notice under section 263 when there is an initial lack of jurisdiction. But in neither of the cases cited by the respondents did the courts hold that the ambit of the court's power is limited to scrutinising whether the jurisdiction was properly assumed or not by the Commissioner.
8. In the case of Indian Card-board Industries v. Collector of Central Excise, [1992] 58 ELT 508 (Cal), after considering the decision cited, I had held that the court in exercising the jurisdiction under article 226 of the Constitution will interfere with the show-cause notice in the following circumstances:
“(1) When the show-cause notice ex facie or on the basis of admitted facts does not disclose the offence alleged to be committed.
(2) When the show-cause notice is otherwise without jurisdiction.
(3) When the show-cause notice suffers from an incurable infirmity.
(4) When the show-cause notice is contrary to judicial decision or decision of the Tribunal.
(5) When there is no material justifying the issuance of the show-cause notice.”
9. The same principles will apply to notices under section 263 of the Act.
10. In my view, in this case, the notice under section 263 suffers from an incurable infirmity and can be set aside by this court under article 226.
11. The Bombay High Court in the case of Seksaria Biswan Sugar Factory Ltd., [1990] 184 ITR 123 had to consider a situation which was substantially identical with the facts in the case before me. In that case, the assessee had claimed deduction in respect of a donation to the very same research centre. The deduction was allowed as the research centre was enjoying the approval of the prescribed authority at that time. The approval was subsequently rescinded. A notice was issued by the Income-tax Officer under sections 147(b) and 148 seeking to reassess the assessee on the ground that the deduction had been wrongly allowed. The Bombay High Court held that (at page 126):
“It has to be held that the information in the form of retrospective cancellation of the approval of the concerned institution as an agricultural institute within the meaning of section 35(1)(ii) by notification dated January 2, 1986 was apparently invalid and unreliable. The formation of belief that income chargeable to tax had escaped assessment on the basis thereof was, thus, without any material.”
12. With respect to the learned judge, I adopted the reasoning in that judgment in support of the conclusion reached by me in this case.
13. The decision of the Division Bench of this court in CIT v. E. Sefton and Co. (P) Ltd., [1989] 179 ITR 435 (Cal), relied upon by the respondents is not applicable to this case. In that case, there was admittedly a retrospective amendment. It was therefore, held that the assessment order could be revised. In this case there is no such statutory provision enabling the Central Government to rescind a notification retrospectively.
14. The decision in S.M Oil Extraction (P) Ltd., [1991] 190 ITR 404 (Cal) also does not assist the respondents. The Commissioner can certainly take into consideration subsequent information for the purpose of initiating proceedings under section 263 so that an assessment order which was good when it was made, in the light of such subsequent information may appear erroneous. The question, however, is not whether the retrospective cancellation of the approval could be considered but whether the Central Government could have retrospectively rescinded the approval at all. Therefore, for the reasons aforesaid, I allow this writ application, and make the rule absolute. The impugned notices under section 263 dated February 16, 1987, in respect of the assessment years 1982–83 and 1983–84, being annexure “G” to the petition, are set aside. Any proceedings taken on the basis of the impugned notices are also quashed.
15. There will be no order as to costs.
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